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2016 (2) TMI 412 - KARNATAKA HIGH COURT

2016 (2) TMI 412 - KARNATAKA HIGH COURT - [2016] 383 ITR 59 - TDS u/s 194A - non deduction of tds - provisions of Sections 201 and 201[1] attracted - whether no income accrued to the payees? - Held that:- Section 194A of the Act mandates the tax deductor to deduct 'income tax' on 'any income by way of interest other than income by way of interest on securities'. The phrase 'any income' and 'income tax thereon' if read harmoniously, it would indicate that the interest which finally partakes the c .....

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ct tax as no income accrued to the payees [suppliers].

The provision of law existing on the relevant date of passing of the order by the TDS Officer would establish that Sections 201 and 201[1A] of the Act were not applicable to the appellant's case. In the circumstances, the Assessee falls outside the scope of Section 194A read with Section 200 of the Act during the relevant assessment years. Thus, the consequential provisions of Section 201(1) and Section 201(1A) are not attracted. .....

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39; for short) relating to the assessment years 2005-06 to 2007-08. 2. Facts in brief are: The appellant is an undertaking of the Government of Karnataka engaged in power transmission. The appellant purchases electricity from various parties by entering into power purchase agreements. For such purchases, when payment of purchase price is delayed, the agreements provide for payment of interest to suppliers of electricity by the appellant. During the assessment years i.e., 2005-06, 2006-07 and 200 .....

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mount of provision towards contingent interest payable as expenditure instead, it arrived at the taxable income without excluding such amounts of provision towards such interest. However, as these amount of provision created by book entries towards contingent interest payable for assessment years 2005-06 and 2006-07, a corresponding reversal entries were made in the books of accounts during the financial year 2007, indicating that the subject amounts of provision towards contingent interest woul .....

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t should have deducted tax at source on the amount of provision made towards likely interest payable in respect of related purchase payments and held the appellant as an assessee in default and further, invoked the provisions of Section 201(1) and 201(1A) of the Act Accordingly, orders under Section 201(1) and Section 201(1A) of the Act for the assessment years in question were passed. 4. On appeal by the assessee before the Appellate Commissioner, the same was confirmed against which appeals we .....

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al was justified in ignoring the evidence and submissions of the appellant with regard to mutual agreement between the appellant and the suppliers of power not to enforce the interest clause in the Power Purchase Agreement and thereby the appellant had no obligation to pay interest and consequently, had no obligation to deduct tax at source under Section 194A of the Act. 2. Whether in law, the Tribunal was justified in upholding the levy of tax u/S 201(1) and the interest u/S 201(1A) when the bo .....

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deduction of tax at source even when no income accrued to the payees (the suppliers) (iii) Jurisdiction of the Officer to invoke Section 201(1) and 201(1A) of the Act. 7. The learned counsel elaborating the arguments on these three aspects would contend that primarily, the provision for contingent liability - payment of interest towards belated payments of purchase of electricity from power suppliers could not be considered as interest at all. In this background, the definition of interest as pr .....

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n the books of accounts, actually and ultimately, interest was not paid. There would be no liability to deduct tax as no income accrued to the payees (suppliers) as the interest was not paid. This is a case where the appellant and the suppliers by the understanding and conduct were ad-idem that no liability to pay interest arose on belated payment of purchase price. 9. Further, it is contended that there are two types of defaults that arise from non-compliance with the provisions of Section 194( .....

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ated that the amount of tax deducted should be paid to the credit of the Central Government within the prescribed time limit. It does not spell out about the person who has not deducted tax at source. It is concerned exclusively with those who had deducted tax at source. The provisions of Section 201(1) contemplates who are all the persons who would have to face the consequences of: (1) failure to deduct tax (2) failure to pay the tax deducted at source to Government account. 11. Much emphasis i .....

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trospective effect from 01.06.2002, the term 'any such person' that existed in the old provision was substituted by the terms 'any person'. A new clause, clause a of sub-section(1) of Section 201, "who is required to deduct any sum in accordance with the provisions of this Act…" was introduced. The said Finance Bill, 2008 bringing in the above amendment with retrospective effect from 1.6.2002 received the assent of the President of India only on 10.05.2008 i.e., .....

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ll as the Tribunal while upholding the order of the TDS Officer. 13. Learned counsel in support of his contention places reliance on the following Judgments: 1. [A] KEDARNATH JUTE MFG.CO.LTD. vs. COMMISSIONER OF INCOME TAX (1971) 82 ITR 0363 2. DIRECTOR OF INCOME-TAX vs ERICSSON COMMUNICATIONS LTD. ((2015) 378 ITR 395 (Delhi) 14. Per contra, learned counsel appearing for the revenue justifies the order and would contend that during the course of survey it was found that the assessee-company has .....

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provision if reversed later, would be out of the scope of the TDS provisions. The assessee not deducting tax can never take shelter under the provisions of Section 201 of the Act prior to the amendment to shed away with the statutory responsibility. 15. Learned counsel placing reliance on Circular No.1/2009 dated 27.03.2009 would contend that Subsection (1) of Section 201 of the Act has been amended to clarify that where a person, including the principal officer of a company who is required to .....

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on Communications (supra) contending that the said judgment was rendered in the context of Section 195 of the Act wherein. Section 195 of the Act imposes a statutory obligation on any person responsible for paying the non resident any sum 'chargeable under the provisions of the Act' which expression do not find place in Section 194-A of the Act. 17. It is further contended that [a] the tax deductor had failed to satisfy the Officer-in-charge of TDS that taxes due have been paid by the de .....

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tor's report and as such the Assessee is in default. In the circumstances, the Authorities have rightly invoked the provisions of Sections 201 and 201[1A] of the Act. The Tribunal after elaborately considering the grounds urged by the Assessee and analytically examining the material on record, had confirmed the order passed by the Authorities as mandatory provision under Section 194A of the Act has not been complied by the Assessee. 18. It is further contended that even prior to the amendmen .....

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in dispute that the Assessee has made a provision towards contingent payment of interest to suppliers of electricity when payment of purchase price is delayed by the appellant. Though the said provision is made towards contingent interest payable as expenditure, as per the return of income filed by the Assessee, the taxable income is arrived adding back such amount of provision towards contingent interest. The assessee having noticed, payment of such interest made in the provision would never b .....

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ould not form 'any income' in the hands of payees (suppliers). 21. Section 194A[1] of the Act and explanation thereof reads thus: "Interest other than "Interest on securities" 194A. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income [by way of interest on securities], shall, at the time of credit of such income to the account of the payee or at the time of payment .....

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liable to deduct income-tax under this section.] [Explanation.-For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.]". .....

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o penalty shall be charged under Section 221 from such person, principal officer or company unless the [Assessing] Officer is satisfied that such person or principal officer or company, as the case may be, has [without good and sufficient reasons] failed to deduct and pay the tax." 23. The expression 'any such person' referred to in Section 200 of the Act and in the cases referred to in Section 194 of the Act restricts to the person mentioned in Section 200 of the Act. Section 200[1 .....

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rom these provisions, prior to passing of the Finance Act, 2008, the provisions of Section 200 mandated that the amount of tax deducted should be paid to the credit of the Central Government. It does not speak about the person who has not deducted tax at source. If the said Section 200 is applied to Section 201[1] of the Act, it is only the following three categories of persons are held liable for the consequence of failure to deduct tax at source [a] any person deducting any sum [b] Employer, w .....

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hole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax: Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be a .....

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essing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax." 24. By this amendment, the term 'any such person' is substituted with 'any person' including the Principal Officer of the Company. A new clause "who is required to deduct any sum in accordance with the provisions of the Act" is introduced. This amendment is given retrospective effect from 1.6.2002 and has received the assent of the President of .....

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t by Finance Act 2008 was introduced to clarify the term 'person' envisaged in Section 200 of the Act. In fact, it was the intention of the legislature to bring the person i.e., the Principal Officer of a Company who is required to deduct any sum in accordance with the provisions of the Act under the umbrella of Section 201[1] of the Act. The same is clarified by the Finance Act, 2008 with retrospective effect from 1.6.2002. This amendment Act was not in force during the relevant assessm .....

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st other than income by way of interest on securities'. The phrase 'any income' and 'income tax thereon' if read harmoniously, it would indicate that the interest which finally partakes the character of income, alone is liable for deduction of the income tax on that income by way of interest. If the said interest is not finally considered to be an income of the deductee, as per reversal entries of the provision in the present case, Section 194A[1] of the Act would not be made .....

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dealing with the case of Section 195 of the Act wherein obligation of a person to deduct tax at source would be applicable to the 'income chargeable under the Act'. Absence of such words 'chargeable to tax' under the provisions of Section 194-A of the Act would not empower the authorities to invoke the provisions of Sections 201 and 201(1A) of the Act ignoring the words 'any income by way of interest'. 27. Yet another reason assigned by the Tribunal to reject the appeal .....

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y u/s. 271C of the Act." Based on this circular, it is held that the assesseecompany has failed to prove that neither the deductorassessee had deducted and remitted the tax nor the deductee-assessee had paid the same through advance tax or self assessment tax. It is the case of the assessee that the provision which was contingent was at no time materialized as income to be liable for payment of income tax on the said provision of interest. In such circumstances, the reasoning of the Tribuna .....

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